Proposed Opportunity Zones regulations and what to expect
By Opportunity Zone Expo Staff
The Department of the Treasury has announced draft rules and regulations to bring clarity to investors on the tax implications of investing in Opportunity Zones.
Opportunity Zones were established by the Tax Cut and Jobs Act of 2017. More than 8,700 communities in all 50 states were certified as Opportunity Zones. According to the Treasury, the program was put in place to drive economic development and create jobs by advocating long-term investments in economically distressed communities.
Through the program, investors can defer paying tax on gains from selling property by investing the proceeds from the sale into an Opportunity Zone Fund.
The first set of guidelines released on October 19 cover how investors can qualify for deferral of gains, defines what make up a Qualified Opportunity Fund (QOF) and how to treat tangible business property in an Opportunity Zone. Further guidance will be provided at a future time.
“There is a current 60-day comment period running from October 19 and due to the complexities in the program and the high volume of comments, I anticipate final regulations will not be issued for quite some time – possibly a year or two,” says Blake Christian, a CPA at Holthouse, Carlin, Van Trigt, a Southern California accounting firm.
Christian says the Treasury will most likely sift through the proposed regulation comments, temporary regulations will be issued and final regulations will probably be delayed for some time to allow taxpayers and the IRS to evaluate real-world projects and related tax issues.
John Buhl, spokesman for the Tax Foundation, a Washington, D.C.-based think tank, says there are some ambiguities in the law that the regulation may try to clear up or require legislative correction. Buhl says one point not fully addressed is how to treat the gain from an investment made in a Qualifying Opportunity Fund that is realized after the zone’s designation happens to expire.
“The proposed rule could have just assumed that designated OZ’s basically expire at the end of 2028 without exception, since the law doesn’t mention what happens after that. But that would’ve created a rush to qualify and invest,” says Buhl.
He says if the Treasury had instead provided taxpayers an infinite timetable to defer tax on recognized gains, it would have made for a challenging compliance environment.
“Allowing investors to recognize gains up to 2047 is a reasonable stopgap measure, but it’d be helpful for Congress to clear things up with new legislative language,” says Buhl.
For investors, the tax benefits of the Opportunity Zone program cannot be overstated, says Derek Uldricks, president of Virtua Capital Management in San Diego. He says the program allows investors to delay, reduce and ultimately eliminate capital gains tax.
“The program allows investors to reinvest capital gains from the sale of any asset – stocks, an art collection, real estate, etc. – in a qualified Opportunity Zone Fund within 180 days. Investors who reinvest in an Opportunity Zone Fund can defer capital gains tax until 2026,” says Uldricks.
He says they also reduce the capital gains tax on the initial investment by 10 percent after five years, another 5 percent after seven years. On the final sale of the Opportunity Zone investment, investors pay zero capital gains taxes if the asset is held for 10 years, adds Uldricks.
While investors await final rules, experts say that those who follow the current proposed regulations will be protected, even if final regulations differ slightly.
“Even though the program has some open issues, I am recommending that clients with gains already triggered should establish a QOF to park the funds within 180 days to ensure deferral eligibility. The funds can always be extracted without significant economic impact,” says Christian.